“Panic Seems To Be In The Air”

By Ven Ram, Bloomberg Markets Live reporter and strategist

After a Midsummer Night’s Dream in July, US stocks are convulsing all over again.

With speaker after Fed speaker hammering home the message of higher rates, the reality of higher discount rates is weighing on sentiment. The Fed’s dot plot shows us that a pause from rate hikes may not come before the benchmark reaches 4.6%, but of course that’s not a guarantee. But is it all really down to just the Fed pushing rates higher?

All that rate volatility stemming from the UK can have a bigger domino effect on assets as pension fund managers — stung by the fiasco of policymakers unveiling fiscal stimulus at a time when inflation is already running rife and wrecking their P&L — turning uber cautious with the other assets in their portfolio. Front and intermediate bond yields in the UK — which don’t enjoy the Bank of England’s backstop in its current emergency operations — are still climbing higher.

Meanwhile, Prime Minister Liz Truss and Chancellor Kwasi Kwarteng will reportedly hold emergency talks with the head of the Office of Budget Responsibility before being presented with a first draft of full forecasts from the fiscal watchdog next week. Still, it may make serve well to calibrate the sense of optimism that we have seen overnight in the pound.

Amid all this, the Fed must be hoping that all this tumult doesn’t impinge on US financial markets. However, it’s perhaps not entirely a coincidence that US investors are parking record amounts of cash with the Fed. Panic seems to be in the air.

As Larry Summers alluded on Thursday, when you mix extraordinary volatility with leverage and policy uncertainty, high underlying inflation and commodity uncertainty stemming from a war, firefighters shouldn’t take too many vacations.

The Fed will doubtless be prepared for any spillover.